the financial action task force (fatf) and the role of lawyers in combating money laundering and...

THE FINANCIAL ACTION TASK FORCE (FATF) AND THE ROLE OF LAWYERS IN COMBATING MONEY

LAUNDERING AND TERRORIST FINANCING: LESSONS FROM THE U.K. APPROACH AND THE

RESPONSE OF THE U.S. BAR

DELAWARE TAX INSTITUTEWIDENER UNIVERSITY DELAWARE LAW SCHOOL

NOVEMBER 20, 2015

Presented byJohn A. Terrill, II

November 20, 2015

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Heckscher Teillon Terrill & Sager, P.C.100 Four Falls, Suite 300

West Conshohocken, PA 19428(610) 940-2600

Introduction to FATF

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The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 by the Finance/Treasury Ministers of its member jurisdictions. The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.

The FATF has developed a series of Recommendations that are recognized as the international standard for combating money laundering and the financing of terrorism and proliferation of weapons of mass destruction.

The FATF monitors the progress of its members in implementing necessary measures, reviews money laundering and terrorist financing techniques and counter-measures, and promotes the adoption and implementation of appropriate measures globally.

FATF is currently reviewing the United States as a part of its Mutual Evaluation process. A report is expected some time in 2016.

Excerpted from the FATF website (www.fatf-gafi.org)

http://www.fatf-gafi.org/

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The customer due diligence and record-keeping requirements set out in Recommendations 10, 11, 12, 15, and 17 apply to designated non-financial businesses and professions (DNFBPs) in the following situations: (d) Lawyers, notaries, other independent legal professionals and accountants

– when they prepare for or carry out transactions for their client concerning the following activities:

buying and selling of real estate; managing of client money, securities or other assets; management of bank, savings or securities accounts; organisation of contributions for the creation, operation or

management of companies; creation, operation or management of legal persons or

arrangements, and buying and selling of business entities.

Recommendation 22. DNFBPs: Customer Due Diligence

Recommendation 10. Customer Due Diligence

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Financial institutions [now read: Lawyers] should be required to undertake customer due diligence (CDD) measures when:

(i) establishing business relations;

(ii) carrying out occasional transactions

(iii) there is a suspicion of money laundering or terrorist financing; or

(iv) the financial institution has doubts about the veracity or adequacy of previously obtained customer identification data.

The CDD measures to be taken are as follows:

(a) Identifying the customer and verifying that customer’s identity

(b) Identifying the beneficial owner, and taking reasonable measures to verify the identity of the beneficial owner. For legal persons and arrangements this should include financial institutions understanding the ownership and control structure of the customer.

(c) Understanding and, as appropriate, obtaining information on the purpose and intended nature of the business relationship.

(d) Conducting ongoing due diligence on the business relationship.

Recommendation 23. DNFBPs: Other measures

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The requirements set out in Recommendations 18 to 21 apply to all DNFBPs, including: Lawyers, notaries, other independent legal professionals and accountants

should be required to report suspicious transactions when, on behalf of or for a client, they engage in a financial transaction in relation to the activities described in paragraph (d) of Recommendation 22.

Recommendation 22. (d) Lawyers, notaries, other independent legal professionals and accountants – when they prepare for or carry out transactions for their client concerning the following activities:

buying and selling of real estate; managing of client money, securities or other assets; management of bank, savings or securities accounts; organisation of contributions for the creation, operation or management

of companies; creation, operation or management of legal persons or arrangements,

and buying and selling of business entities.

Recommendations 20 & 21. STR and NTO

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Recommendation 20. Reporting of suspicious transactions (“STR”) If a financial institution [now read: Lawyers] suspects or has

reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing, it should be required, by law, to report promptly its suspicions to the financial intelligence unit (FIU) – [FinCen in the United States]

Recommendation 21. Tipping-off and confidentiality (“NTO”) Financial institutions [now read: Lawyers], their directors,

officers and employees should be . . . (b) prohibited by law from disclosing (“tipping-off”) the fact that a suspicious transaction report (STR) or related information is being filed with the FIU.

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The United States, a key member of FATF, has agreed to implement these policies and to apply them to lawyers.

These policies already apply to banks and financial institutions under the Bank Secrecy Act and the USA PATRIOT Act.

The efforts of the ABA, and its partners, including ACTEC have been crucial in slowing the effort to impose legislative or regulatory CDD, STR and NTO obligations on American lawyers.

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Lawyers in the United Kingdom are subject to a comprehensive CDD, STR and NTO regime in a manner similar to banks/financial institutions in the United States under the BSA, USA PATRIOT Act, etc.

Money Laundering Regulations 2007 (CDD) Proceeds of Crime Act 2002 (STR/NTO)

If the United States imposed a formal CDD/STR/NTO regime on lawyers, it might look like the United Kingdom’s

But it could never happen here, could it?The United Kingdom’s Imposition of CDD/STR/NTO Obligations on Lawyers

The United Kingdom’s Approach—Customer Due Diligence: the Money Laundering Regulations 2007

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Regulation 3. (1) Application of the Regulations. . .these Regulations apply to the following persons acting in the course of business carried on by them in the United Kingdom (“relevant persons”)—

(a) credit institutions;

(b) financial institutions;

(c) auditors, insolvency practitioners, external accountants and tax advisers;

(d) independent legal professionals;

(e) trust or company service providers;

(f) estate agents;

(g) high value dealers;

(h) casinos.

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Regulation 3. (9) “Independent legal professional” means a firm or sole practitioner who by way of business provides legal or notarial services to other persons, when participating in financial or real property transactions concerning—

(a) the buying and selling of real property or business entities; .

(b) the managing of client money, securities or other assets; .

(c) the opening or management of bank, savings or securities accounts; .

(d) the organisation of contributions necessary for the creation, operation or management of companies; or .

(e) the creation, operation or management of trusts, companies or similar structures and, for this purpose, a person participates in a transaction by assisting in the planning or execution of the transaction or otherwise acting for or on behalf of a client in the transaction.


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Regulation 5. “Customer due diligence measures” means— (a) identifying the customer and verifying the customer’s identity on the basis of documents, data or information obtained from a reliable and independent source;

(b) identifying, where there is a beneficial owner who is not the customer, the beneficial owner and taking adequate measures, on a risk-sensitive basis, to verify his identity so that the relevant person is satisfied that he knows who the beneficial owner is, including, in the case of a legal person, trust or similar legal arrangement, measures to understand the ownership and control structure of the person, trust or arrangement; and

(c) obtaining information on the purpose and intended nature of the business relationship.

Fourth EU Money Laundering Directives (May 2015) EU Member States are now required to maintain a central register of information

on the ultimate beneficial owners of corporate and other legal entities, as well as trusts.


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Part 7: Money Laundering is Sections 327-340 Section 340. Definition of “Criminal Property”

(2) “Criminal conduct” is any offence in the United Kingdom or would constitute an offence if it occurred there

(3) Property is “criminal property” if it constitutes a benefit from criminal conduct

(4) It is immaterial who carried out the conduct, who benefitted and whether the conduct occurred before or after the passage of the Act.

The United Kingdom’s Approach—Money Laundering: the Proceeds of Crime Act 2002 (“POCA”)

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The “Substantive Offenses” apply to everyone in the UK Section 327 – It is a crime to conceal, disguise, convert, transfer

criminal property. Section 328 – It is a crime to “become concerned in an arrangement”

which he or she knows or suspects facilitates the acquisition retention or use of criminal property.

Section 329 – It is a crime to acquire or use criminal property. A defense to all three crimes is to make an “authorised disclosure” and to

receive the appropriate consent to proceed with the conduct or transaction from the National Crime Agency The NCA has 7 days to grant or deny consent otherwise consent is

presumed. If the NCA denies consent, it has 31 days to obtain an injunction.

The United Kingdom’s Approach—Money Laundering: the Proceeds of Crime Act 2002 (“POCA”)

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Section 330. Failure to Disclose: Regulated Sector A person commits an offence if:

He or she (a) knows or suspects, or (b) has reasonable grounds for knowing or suspecting, that another person is engaged in money laundering;

the information came to him or her in the course of a business in the regulated sector; and

He or she does not make the required disclosure as soon as is practicable after the information or other matter comes to him or her.

The United Kingdom’s Approach—STR/NTO:the Proceeds of Crime Act 2002 (“POCA”)

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Schedule 9: Regulated Sector (1) A business is in the regulated sector to the extent that it engages in any of the following activities in the United Kingdom—

(i) the provision by way of business of advice about the tax affairs of another person by a body corporate or unincorporate or, in the case of a sole practitioner, by an individual; .

(l) the provision by way of business of legal services by a body corporate or unincorporate or, in the case of a sole practitioner,

by an individual and which involves participation in a financial or real property transaction (whether by assisting in the planning or execution of any such transaction or otherwise by acting for, or

on behalf of, a client in any such transaction);

(m) the provision by way of business of services in relation to the formation, operation or management of a company or a trust;


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Interpretive note to FATF Recommendation 23: DNFBPs are not required to report suspicious transactions if the relevant information was obtained in circumstances where they are subject to professional secrecy or legal professional privilege

Section 330. Exceptions for Legal Professional Privilege

(6) A person does not commit the failure to disclose offense if he or she is a lawyer and the information or other matter came to him or her in “privileged circumstances”

(10) Information is acquired in privileged circumstances if it comes to a solicitor if the person is seeking legal services or contemplated legal proceedings

(11) Privileged circumstances will not apply if the client is seeking information with criminal intent


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Section 333A. Tipping off: regulated sector

(1) A person commits an offence if—

(a) the person discloses that he or she has made [a disclosure to the NCA of known or suspected money laundering conduct]

(b) the disclosure is likely to prejudice any investigation that might be conducted following the disclosure referred to in that subsection; and

(c) the information on which the disclosure is based came to the person in the course of a business in the regulated sector.


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Customer Due Diligence Probably no ethical conflict Model Rule of Professional Conduct 1.1 requires a lawyer to “provide

competent representation to a client.” Competent representation is defined as “the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.”

Lawyers routinely perform due diligence with respect to conflicts of interest, but due diligence may be required so as not to unwittingly assist a client in a crime or fraud. See Terry, Laurel and Terrill, II, John A. Chapter on Ethical Dimensions in forthcoming American Bar Association Gatekeeper Book.

**Recently, the Supreme Court of Canada in Canada (Attorney General) v. Federation of Law Societies of Canada, 2015 SCC 7 (February 13, 2015) held that regulations requiring lawyers who receive funds from clients to make the product of customer due diligence available to investigative authorities violates the Canadian Charter of Rights and Freedoms in that the regulations infringe upon a lawyer’s right to be free of unreasonable searches and seizures, and that the regulations infringe upon the “principle of fundamental justice that the state cannot impose duties on lawyers that undermine their duty of commitment to their clients’ causes.”

Ethical Obligations of American Lawyers: What if the US imposed a UK-style regime on lawyers?

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Customer Due Diligence FinCEN Notice of Proposed Rule Making—Customer Due Diligence

Requirements for Financial Institutions, 79 Federal Register 45151, (Department of Treasury, Financial Crimes Enforcement Network, August 4, 2014)

“The proposed rules would contain explicit customer due diligence requirements and would include a new regulatory requirement to identify beneficial owners of legal entity customers, subject to certain exemptions.”

The new regulations will apply to banks and financial institutions with a customer identification program requirement (not lawyers and law firms) to identify the beneficial owners of entities.

The Preamble to the Notice stated that identifying beneficial ownership of private trusts was not intended to be a part of the new requirements; however, private trusts were not specifically excluded from the definition of “legal entities” in the previous round of draft regulations.

Ethical Obligations of American Lawyers: What if the US imposed a UK-style regime on lawyers?

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Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering and Terrorist Financing (April 2010)*

A resource for designing and implementing risk-based approaches consistent with FATF’s guidance.

Outlines various areas of risk (location, client, service, etc.) Details internal controls for higher risk clients and

engagements Provides guidance on procedures for client intake and

customer due diligence.* Prepared by the ABA’s Task Force on Gatekeeper Regulation and the Profession, various sections of the ABA, the American College of Trust and Estate Counsel, the American College of Real Estate Lawyers, the American College of Mortgage Attorneys and the American College of Commercial Finance Lawyers.

The American Bar’s Response to the Efforts to Impose CDD/STR/NTO Obligations on Lawyers

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Formal Opinion 463 (May 23, 2013) Client Due Diligence, Money Laundering and Terrorist Financing

American Bar Association: Standing Committee on Ethics and Professional Responsibility

Generally offers guidance to lawyers and encourages the implementation of risk-based control measures, as set forth in the Good Practices Guidance, to avoid assisting in money laundering or terrorist financing while preserving lawyers’ continued obligations under the Model Rules of Professional Conduct.

Last year, the Conference of Chief Justices, referencing Formal Opinion 463, formally endorsed the Voluntary Good Practices Guidance


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A Lawyer’s Guide to Detecting and Preventing Money Laundering

A collaborative publication of the International Bar Association, the American Bar Association and the Council of Bars and Law Societies of Europe published October 22, 2014

An awareness effort to educate the legal profession on AML obligations from an ethical perspective and a legislative/regulatory standpoint.

The Guide: Summarizes AML obligations of lawyers Discusses vulnerabilities of the legal profession to money laundering Discusses the risk-based approach to detecting red flags; and Provides case studies to illustrate how red flags arise in practice

The International Bar’s Efforts

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American Lawyers’ Ethical Obligations Model Rule of Professional Conduct 1.2(d)

A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law.

Model Rule of Professional Conduct 1.16 (a) Except as stated in paragraph (c), a lawyer shall not represent

a client or, where representation has commenced, shall withdraw from the representation of a client if: (1) the representation will result in violation of the rules of

professional conduct or other law;


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American Lawyers’ Ethical Obligations Model Rule of Professional Conduct 8.4 – It is professional

misconduct for a lawyer to:

(a) violate or attempt to violate the Rules of Professional Conduct, knowingly assist or induce another to do so, or do so through the acts of another;

(b) commit a criminal act that reflects adversely on the lawyer's honesty, trustworthiness or fitness as a lawyer in other respects;

(c) engage in conduct involving dishonesty, fraud, deceit or misrepresentation;


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Suspicious Transaction Reporting Model Rule of Professional Conduct 1.6 Confidentiality Of Information

(a) A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b).

Model Rule of Professional Conduct 1.18 Duties To Prospective Client

(b) Even when no client-lawyer relationship ensues, a lawyer who has learned information from a prospective client shall not use or reveal that information, except as Rule 1.9 would permit with respect to information of a former client.


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Model Rule of Professional Conduct 1.6(b) – A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary:

(1) to prevent reasonably certain death or substantial bodily harm;

(2) to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer's services;

(3) to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client's commission of a crime or fraud in furtherance of which the client has used the lawyer's services;

. . .

(6) to comply with other law or a court order


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No Tipping Off Model Rule of Professional Conduct 1.4(a) – A lawyer shall:

(5) consult with the client about any relevant limitation on the lawyer's conduct when the lawyer knows that the client expects assistance not permitted by the Rules of Professional Conduct or other law.


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FATF Website www.fatf-gafi.org

FATF 2012 Forty Recommendations

http://www.fatf-gafi.org/media/fatf/documents/recommendations

/pdfs/FATF_Recommendations.pdf Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering

and Terrorist Financing

http://www.americanbar.org/content/dam/aba/publishing/criminal_justice_section_newsletter/crimjust_taskforce_gtfgoodpracticesguidance.authcheckdam.pdf

Formal Opinion 463 (May 23, 2013) Client Due Diligence, Money Laundering and Terrorist Financing

http://www.americanbar.org/content/dam/aba/administrative/professional_responsibility/formal_opinion_463.authcheckdam.pdf

Terrill, II, John A. & Breslow, Michael A. The Role of Lawyers in Combating Money Laundering and Terrorist Financing: Lessons from the English Approach. 59 N.Y.L. Sch. L. Rev. 433 (2014–2015)

http://www.nylslawreview.com/wp-content/uploads/sites/16/2015/05/NYLS_Law_Review_Volume-59-3.Terrill-Breslow.pdf

Important Web Links

http://www.fatf-gafi.org/

http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF_Recommendations.pdf










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